I have been eyeing a sugar short for about a week looking for a good entry point which I believe we got today. According to Moore's data a sugar short this time of year has been profitable 13 of the past 15 years. The reason price typically drops this time of year is beet harvest begins in autumn, and beets must be in the bin before the first freeze in northern states. Prices tend to rally from a late-Septembers seasonal bottom into October but prices decline again into December as new sugar supply becomes more readily available.
We would be entering this trade a few days early according to Moore's who gives an entry date of November 2nd but we received an exhaustion candle yesterday and got our swing high today. Sugar also received a sell signal in the CCI last week crossing the 200 level. I feel more comfortable entering early and setting a loose stop to catch as much of this drop as possible.
Looking at the weekly charts we can see that sugar has hit extreme overbought levels on the RSI and stochastic oscillator indicating a price reversal is coming. Price doesn't usually stay at these levels for long.
Sentiment levels are also at extremes in sugar. Comparing the sugar chart to sentiment data shows you that extreme sentiment typically coincides with a corrective movement in sugar over the past 10 years the few times sentiment has hit these levels.
A drop to the 50 DMA from it's current value near 1470 would be worth $1,344 (120 point drop x $11.20 per point). We will place our stops above the February 2020 high at 1520 risking $560. That is nearly a 3:1 risk reward ratio. Margins on sugar are currently $1,047.00 per contract. I feel more comfortable in agriculture and soft trades right now as they will be less influenced by stimulus talk and the election and more subject to supply and demand, and with beet harvest coming supply should increase soon.
Soybean Meal has had a heck of a run since the August low. Soybean meal has no historical trade by Moore's and it is not followed by Sentiment Trader so we are just going to make the trade based on extreme overbought conditions that are in the market place right now. Soybean meal has only reached overbought conditions 4 times the past three years and at no point was it ever any more overbought.
Soybean meal made a swing high tonight so that is our sell signal. We recommend selling at any point above $380 with the stop at 392.
We believe that prices from this extreme level should retrace 50% of the move since the August low. This would bring the price right to the 50 day moving average which would be around 340 at that time. This has the potential for a 40 point move. You would be risking 12 points on the trade giving you just over a 3-1 risk reward ratio on the trade.
The margin required for a soybean meal contract is $1500. Each dollar ZM moves is worth $100. You would be risking 12 points on the trade, or $1200. The gain from a 40 point move would be worth $4000.
Wheat has had an epic run, rallying over $1.50 per bushel since the June low. Wheat has reached the point where it should be running out of buyers at this point. The optimism index is telling us that wheat is near the zenith.
It could not have reached this point at a better time as Moore's research shows that shorting wheat today, on 10/21, has been profitable 14 of the last 15 years.
Wheat formed a swing high today signaling the uptrend in price is over and it is time for a price reversal. The swing high coincided with hitting overbought levels on the CCI.
Looking at the weekly charts we can see wheat is at extreme overbought levels on both the RSI and slow stochastic. Extremes at these levels will need a corrective movement and all the stars are aligning for that movement to come now.
With price highly elevated on wheat, it has plenty of room to fall. At $50 a point, a drop from the current price at 625 to the 50 DMA at 563 would be worth $3,100 per contract. I imagine price will at least revert to the 50 DMA with resistance at the 595 and 575 level.
Margin for a wheat contract is $1,403 per contract. With an entry at 625 we will place stops above the previous trading range at 640. We will be risking $750 per contract. That is a risk reward ratio of nearly 4:1.
You are not going to see me recommend a natural gas trade very often, but there are too many stars aligning to not take some risk.
I am going to diagram this trade backwards and begin with Moore's. Moore's research shows that this trade has worked 15 of the past 15 years. The reason it works is because heating season for natural gas begins November first. The industry accumulates supplies prior to heating season only to begin liquidating aggressively as cold weather arrives.
As Moore's states, the accumulation phase results in extreme bullish sentiment. This is what you want to see for an asset ready to drop. Sentiment Trader shows extreme bullish sentiment in NG now.
We are near overbought on the weekly stochastics and RSI.
And on the daily chart we see the 5 day RSI overbought which typically happens at daily cycle tops. Speaking of tops, NG has traded into a triple top. There is a lot of resistance at the 3.30 level which is where I would recommend making an offer to sell at.
I don't think we will be in NG long. Moore's says the average number of days this trade works is 11 so we should be out before the end of the month. Moore's data also shows the average gain on the trade to be .227. At $1000 per .10 point, that would be a $2270 average gain on the trade.
e recommend shorting NG at $3.30 with a stop at $3.37. You are risking .07 points, or $700. NG is late in an intermediate cycle....on week 37. I think we could see the price drop as low as $3.00. As volatile as NG has been, we may only be in NG a couple days but it should drop intermediate cycle trend line around $3.00. That would be a 30 cent drop worth $3000. Risking $700 to make $3000 would be a 4 to 1 risk reward ratio.
Futures margins for Natural Gas NG is $3465 for a contract which is 10,000 MMBtu. There is also a Mini Natural Gas QG contract which is 1/4 the size with a $867 margin requirement.
NG is extremely volatile, especially here lately. I suggest going small on the trade unless you have an account over $100K.
All the confirmations are in place that a new intermediate cycle began on September 26. This was on week 26 when you would expect an ICL to occur. The weekly chart shows a strong close above the 10 week moving average last week which indicates a new intermediate cycle. The RSI and Stochastics are trying to imbed again above the 80 lines which you want in strong trending moves.
The daily chart shows that the ICL occurred 15 days ago. After such a strong move out of the ICL, stocks need a moment to catch its breath. This creates the scenario for a half cycle low to occur. This will be a buying opportunity to ride the rest of this daily cycle. I am looking for the 3 day RSI to reach oversold levels and for a swing low for a buy signal. It won't be today but expect a notification in a day or two.
This morning we got a gap fill on the S&P 500.
We should expect this intermediate cycle to last 15 to 20 weeks at least, perhaps into early next year before the intermediate cycle tops.
This purpose of this post is to give you time to prepare so you can make a rational decision, not an emotional decision. I think the S&P or the NASDAQ will be fine to trade. Tyler and I want to get more involved with your risk management and position sizing to make the trading less stressful for you. We still expect the markets to remain volatile over the next 3 weeks due to the election. A choppy market means timing the entry near the bottom is crucial. The stop will need to be loose, so lets keep the position sizes small and look to build on that in the weeks ahead. If the Republicans can keep control of the senate and the white house we could see a ripping stock market to finish out the year. I still feel good about the stock market even if the Democrats win the white house.
Lets make a decision over the next day or two what you will trade. Deciding not to trade it is also an option.
The 30 Year Bond broke below the previous daily cycle low on several days last week and support held right at the 200 day moving average. The bottom occurred on Wednesday of last week which was day 27. Just today we confirmed a daily swing low and price closed above the 10 day moving average. Price only needs to close above 175.25 tomorrow to confirm a new intermediate cycle.
Bonds are on week 19 which is the early part of the timing band for an ICL. As I mentioned, price does not need to move but a wiggle to confirm a new ICL. A rally out of an ICL, even a week one should last 3 weeks. The Stochastics are just moving into oversold levels and the RSI has bounced off oversold.
I would probably prefer to see these a bit more oversold, but looking at the previous 10 years, you have only had the optix with this much excessive bearishness 3 other times.
Seasonal data would confirm that the October/November time frame is a strong period for Bonds.
We suggest you position size accordingly and bonds make it easy to do so. Margin for the 30 year is $5170, but you could also trade this with the 10 year note for a $1,705 margin, a 5 Year with a $515 margin and even a 2 year with a $396 margin. If you want help picking the right option for you give us a call.
The financial section on the Contract Specs page on the website shows the particulars for the various contracts. On the 30 year, each full point move is worth $1000. My expectation would be that out of an ICL, the 30 year bonds should move at least to the 178 area which would be a a 3 point gain if you buy at 175. We would place the stop at 173'16 which would be risking $1500. This would be a 2-1 Risk Reward Ratio. If we get a good push higher tomorrow, I could see raising the stop quickly, reducing the risk quickly.
Message us with your questions. We can also talk to you personally about position sizing if you would like.
Recommended entry or exit prices may not necessarily be reflected on the track record. Markets can change quickly resulting in stops being moved or profit levels changed based on new information. Brokerage customers are the recipients of these potential price adjustments made after initial recommendations.